ECON03GE3A

Reference

Vamsi Vakulabharanam & Rahul De (2016) Growth and Distribution Regimes in India after Independence, The Round Table, 105:6, 621-640, DOI: 10.1080/00358533.2016.1246860

Introduction

Two narratives of post colonial economic development
- Macro indicators
- Succession of regimes
Both the narratives are important.

The four regimes of accumulation in Independent India (1947-2011)

India on the Eve of Independence

Destroyed traditional industries
Deindustrialised the country.
Left the country with challenges:
- Self sufficiency in agriculture
- Heterogeneous groups and their vested interests
- Technological dependence on the metropolitan economies.

Regime #1

Pre-eminence of Planning and State Capitalism (1950-67)

Pre-eminence of Planning and State Capitalism (1950-67)

Economy under Nehru
- State directed
- Emphasis on heavy industries
Growth of industry - 5.8%
- Government consumption (G) - 6%
State as the main driver of growth.
Investment in industry - 7%
Dual role of public investment.
Resources allocated to long-term industrial investments.

Pre-eminence of Planning and State Capitalism (1950-67)

Import Substitution Regime
- To protect infant domestic industries.
- To increase exports.
Exports growth = 1%
Imports were still higher
- India’s dependence for food, energy, and machinery.
- Imports grew by 40%.
- Current Account Deficit peaked to 3% by 1965.
- More foreign aid needed to finance CAD.

Pre-eminence of Planning and State Capitalism (1950-67) : Class Dynamics & Distributional Effects

Benefits to domestic capital
- Limited expansion of public sector
- Domestic capital protected from external competition.
Benefits to urban skilled workers
Unsuccessful land to tiller policy
- Land redistribution blocked by large landlords
- Limited redistribution
Low growth in agriculture

Pre-eminence of Planning and State Capitalism (1950-67) : Class Dynamics & Distributional Effects

Greater urban-rural inequality
Absence of welfare policy
State $\rightarrow$ GDP growth; Economic Planning $\rightarrow$ Distribution

Pre-eminence of Planning and State Capitalism (1950-67) : Class Dynamics & Distributional Effects

Urban & rural consumption inequality declined

Crisis towards the mid 1960s

Imbalances in agriculture sector.
Inadequate public investment
Failure of land reforms
Growth of agri sector: 1.7%
Structural imbalances led to BoP crisis in 1965 and 1966

Crisis towards the mid 1960s

BoP crisis
- Lack of monsoon
- Fall in agri output (10%)
- Fall in private consumption
- Import of food grains increased in 1966
Imports $\uparrow$ 11% in 1965 $\rightarrow$ 28% in 1966
- Led to BoP crisis
- Pressures to devalue
- Bring down the import substitution regime.

Data Source: World Bank

Ref for events: Inflation In India: Status and Issues by Y.V. Reddy

Regime #2

Green revolution and populism (1967-80)

Green revolution and populism (1967-80)

Agricultural crisis $\rightarrow$ Change in policy (land reform)
The New Agricultural Strategy (1965)
- Improve productivity
  - Technological modernisation
- Investments
  - Crop wise and region wise
Shift from public to private sector investments

Green revolution and populism (1967-80)

State’s role
- Increased agri credit & fertilizer subsidies
- Increased mechanisation
- Support minimum prices

Green revolution and populism (1967-80)

Role of the state in industrial development declined.
Industrial slackening $\rightarrow$ GDP $\downarrow$ 4.5%
Exports $\uparrow$ 7.5%
Increase in government regulation of private and foreign enterprises
- FERA, 1973
- MRTP, 1969
- Nationalisation of banks
External policy
- Improve current account
- Decrease dependence on external powers.
1973: Positive CAD in India for the first time.

Green revolution and populism (1967-80): Class dynamics and distributional effects

Growth of certain crops and regions under Green Revolution.
Large landholders and the rural elite benefited the most.

Green revolution and populism (1967-80): Class dynamics and distributional effects

Rural rich emerged $\rightarrow$ increased powers $\rightarrow$ formation of Interest Groups (politically motivated).
- For instance Lok Dal (led by Charan Singh) that would go on to dethrone Congress in 1978.
Subsidies $\uparrow$ $\rightarrow$ public investment in industries $\downarrow$
Green revolution $\rightarrow$ rural inequality
- Compensatory policies: Garibi hatao
1070s:
- PDS
- IRDP
Poverty declined from 50% to 40%

Rural inequality (1967-80)

Urban inequality (1967-80)

Looming Crisis of the 1970s

In 1971 crisis developed due to
- Decline in public investment $\rightarrow$ Decline in private corporate investments
- Change in the expenditure patterns
  - Capital expenditure to revenue expenditure
  - Increased expenditure funded by
    - raising fiscal deficit
    - increased external commercial borrowings (ECB)
- Collapse of the ISI regime (beginning of 1980s)

Regime #3

High growth with stagnant inequality (1980-91)

High growth with stagnant inequality (1980-91)

IMF loan worth $5.2 bn.
Partial liberalisation
Structural transformation of India
- Relaxation of Industrial licensing
- Decontrol of prices of essentials
- Slash import duties

High growth with stagnant inequality (1980-91)

GDP growth of 5%

High growth with stagnant inequality (1980-91): Class dynamics and distributional effects

Regimes 1 & 2 $\rightarrow$ low growth $+$ mild increase in inequality
Regimes 3 & 4 $\rightarrow$ high growth $+$ very different distributional dynamics
Shift from a progressive nation state to pro-business state
Formation of new business groups.
- Rural elite migrating to urban spaces
- Emergence if IT professionals
The new business groups $\rightarrow$ regional and national parties
- Opposition to the License Raj

High growth with stagnant inequality (1980-91): Class dynamics and distributional effects

Decrease in income inequality
Marginalised class benefited (IRDP)
Inequality declined because
- Political unrest & the Maoist struggles
- Land reforms in Bengal and Kerala (under Communism)
Improvements in the living conditions of all the classes.

High growth with stagnant inequality (1980-91): Class dynamics and distributional effects

Increase in $C$
Vakulabharanam(2010)
- Gini coefficients stayed almost the same/ marginal decline between 1983-84 to 1993-94.

See Table 5 and Fig 2.

Deepening twin crisis by the late 1980s

Imports grew by 7%
Exports fell
CAD started to rise to 3% of GDP
Foreign aid dependency grew
Rise in fiscal deficits (from 3.5% to 5.5%)
Caught in the trap of debt servicing
Fall in public investment $\rightarrow$ deteriorating public investment $\rightarrow$ Investment crisis in 1991
Rising fiscal & CAD would culminate to the crisis in 1991.

Regime #4

High Growth and Rising Inequality (1991-2012)

High Growth and Rising Inequality (1991-2012)

The twin crisis problem
- Fiscal deficit & BoP/CAD
International credit rating fell (in 1991)
Political crisis evolved
Shift in development process
- State to market

High Growth and Rising Inequality (1991-2012)

Liberal Reforms Package
- Fiscal austerity measures
- Liberalisation of external sector
- Financial reforms and market directed development
This regime saw the fastest economic growth
Growth dynamics

(1991-2000)	(2003-2012)
Medium growth	High Growth
Fiscally disciplined state	High expenditures
Unstable investment	High Investment
Low exports and high imports	High Exports and Imports

High Growth and Rising Inequality (1991-2012)

Investment of 15% per annum contributed to 55% of growth
Massive FDI helped decrease dependency on commercial borrowings and foreign aid.